Consequences of intervention not so good

Almost all actions of politicians have unintended consequences. In times of tragedies their mistakes are amplified. Last week, before, during and after “Super Storm” Sandy hit the northeastern United States, governors and attorneys general in that part of the country put out blanket warnings that violators of laws against price gouging laws (laws meant to protect consumers from “excessive” pricing of essential goods and services during emergencies) would be thoroughly investigated and brought to justice for violations. While these actions may be reasonable to the emotional observer, when one applies economic logic to the circumstance it is easy to understand how laws against price gouging have actually caused the current gasoline shortages in the Northeast.

In essence, anti-price gouging laws are price controls. That is to say, they prevent suppliers of goods from charging market prices if those prices are deemed excessive by government. Needless to say, since suppliers are not in the business of losing money, when the price of any good exceeds a government mandated maximum price, suppliers will stop supplying that good. They obviously are not going to sell an item at a loss, as that is a sure recipe to put yourself out of business.

Consequently, a shortage of that good develops. We have seen this happen time and again, most notably with beef during the Nixon price controls in the early 1970s and rental properties in New York City under rent controls.

So how does this apply to the current gasoline shortages experienced by motorists in the Northeast?

Faced with threats by state officials including reductions in profits, fines, directives to set up reimbursement funds, and other penalties, merchants were intimidated to comply with the anti-price gouging laws. Consequently, a critically important market mechanism was prevented from kicking in – namely rising prices in the face of potential shortages caused by disruptions to market flow.

You see, in the free market something valued that is in short supply will always cost more than it does under regular market conditions. That is why the price of meat rises when there is a drought. Instead of a drought, the supply of gasoline to the Northeast has been disrupted by a storm.

Although they are different climatic events, the effect is the same. Yet governors and attorneys general prevented gas suppliers from raising gas prices to meet market conditions. Because of anti-price gouging laws, consumers were able to purchase gasoline before Sandy at below market prices. It’s no wonder this temporary price control on gasoline has caused shortages in their states. Demand was allowed to exceed supply. If the market were left to its own devices, prices would have been allowed to rise and there would be gasoline in New York City right now for emergency use.

But instead, state officials imposed a cap so every Tom, Dick, and Harry could fill up their tanks unnecessarily before the storm.

At the end of the day, anti-price gouging laws are indicative of how we have been running our economy for decades. All sorts of schemes have been implemented to help the poor, homeowners, consumers, students, the sick, the handicapped, etc, etc, etc… They all come with unintended consequences because they are based on emotions not logic. During normal times their consequences are bad enough. In times of tragedy they simply make things worse.